Be prepared

I’ve been quiet. Somewhat intentionally, because I don’t really want to talk about politics and everything these days is politics and that is no fun. Somewhat unintentionally, because things are changing so quickly the written word and publishing the next morning seems hopelessly outdated. But I need to get back on the horse. Apologies in advance that no matter which side you support, I likely will look biased against you in my assessment. It is not intentional. You’d never know it, but I actually really like you.

Not long ago I saw an interview involving two aging rock stars. I’ll leave the names out of it because that is not important. But the discussion turned to LSD, and how to survive and enjoy an acid trip. They were talking about running around New York City on acid. One line stood out to me…

“A lot of stuff you see is not real. But for God’s sake assume the cars are real. If you don’t, you could be f—-ed.”

Honestly, my wife didn’t find that line nearly as remarkable as I did. Much to her chagrin, I’ve been changing the word “cars” to other things and applying it to life lessons left and right.

Which brings us to the current market environment. It has been a rough few weeks, Friday’s gains notwithstanding. And a lot of it has been due to what is going on in Washington. I can’t predict the future. I don’t know if we are at the start of the next great American century or the next great depression. (I’d bet on “neither.”) But there are two general thoughts that I am trying to keep front of mind as we go through this period. I think anyone invested right now would do well to do the same.

1. We’re not screwed yet.

You might not know it from the political rhetoric, but we entered 2025 with the economy in pretty ok shape. The economy looks a little tired and the gap between the “haves” and “have nots” is widening in ways that might indicate we are closer to the end than to the beginning, but things were… fine. Earnings season provided no reason to suggest they are becoming un-fine any time soon, at least in terms of results. The economic realities on the ground do not suggest this selloff was inevitable, and, if anything, I’d argue that the markets (stocks) have oversold the fundamentals (economic data).

Which isn’t to say it is all rocketship emojis from here. It could end up that the economic data will eventually catch up to the markets and even push things further in the wrong direction. Certainly, confidence and spending numbers are not trending in the right direction. But we are not screwed yet.

Guidance suggested more uncertainty than doom. For the most part, the story of earnings season was a backwards beat (the actual numbers were strong!) and troubling guidance (the projections about the quarter to come were not!). A lot of that appeared more tied to uncertainty and CEOs unwilling to put their neck out and make bold predictions at a time when tariffs are coming and going, and government employees are shaken, and all sorts of other chaos is going on.

Chaos might be good long-term. Change might be needed. It might be bad. That’s a political argument for another website. But in the near-term markets (and businesses) hate uncertainty. The bull case for here is economic activity has only frozen, and not declined, and if and when the dust settles and there is more clarity, we will see things pick up again quickly.

If we can get stability, I still think there is a decent possibility of a positive 2025 for the markets.

2. For God’s sake, assume the tariffs are real.

The playbook from the first Trump presidency was to use tariffs as a negotiating ploy, to quickly be pulled back. There has been some sign of this in Trump 2.0 (Colombia, for example), and markets went into this ready to ignore, or minimize, tariffs as noise and not signal.

I am not ready to say definitely that is true or false. But just as with our friends on LSD running through Manhattan seeing cars everywhere, there is much greater risk involved with not taking these tariffs seriously.

Generally speaking, the world is rapidly moving towards self-reliance and away from the multinational model that has ruled over the last few decades. The pandemic really spooked us all and showed the fragility of far-flung supply chains. In-shoring makes sense in that regard. And the appeal of regaining lost jobs is always a political winner. There are cases to be made in either direction (I still by in large favor multinationalism), but I think it is pretty clear the current administration favors self-reliance. So much so that the president is now talking about short-term “disruption” or “disturbance” as the nation goes through the “detox period.”

I really don’t want to debate the merits of this policy. But I do think as investors we should reflect on what short-term might mean. It is a word that politicians on either side of the aisle would favor, because it is both vague and not all that threatening. I certainly don’t blame the president for using it. But I think as investors we need to at least consider scenarios that stretch the definition of short-term.

If the goal is self-reliance, it will take quarters if not years to rebuild the domestic manufacturing base. Even using Elon Musk-speed factory building techniques. Perhaps tariffs can be lowered once businesses have put shovel to ground and are committed to building, but even in that case we are talking about close to a year to get the momentum going. We can’t snap a finger and change the world. “Short-term” as measured by an economic cycle is different than “short-term” as perceived as a couple of weeks of red markets. For planning purposes, at least, I believe an investor should consider the very real possibility of this lasting a lot longer than one might think.

So here we are, in a moment where both our fate (and the fate of the markets) is far from certain, but also in a moment where Pollyanna predictions of a quick turnaround seem potentially very naive. I have no doubt that, over the long-term, it will all work out. The dust will eventually settle, and good management teams can navigate through whatever is in front of them as long as they are certain about what is in front of them. The Era of Self Reliance could usher in great economic gains over time.

But it will take time, if that is where we are going. For investors, the best advice out there is more relevant than ever. I’m keeping any and all money I don’t need over the next five years in equities, excited about the long-term future. And I’m keeping every penny I might need in the next few years out of the markets, conservative about the road ahead.

The only way to survive through chaos is to assume the perceived threats are real.

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